Switzerland’s left-wing party has instigated a referendum for November 24 that asks voters to limit pay ranges so that a company wouldn’t be able to pay top employees more than 12 times what they’re paying their lowest-level employees.

I talked with Neil Cavuto about this proposal and made several (hopefully) cogent points.

But I don’t want to focus today on the Swiss referendum. Instead, I want to expand on my final point, which deals with the misguided belief by some on the left that the economy is a fixed pie and that you have to penalize the rich in order to help the poor.

Now look at this data and ask yourself whether you’d rather be a poor person in France or Hong Kong?

Since Hong Kong is richer and is growing faster, the obvious answer is that poor people in France almost surely face a bleaker outlook.

In other words, the welfare state can give you the basic necessities and allow you to survive (at least until the house of cards collapses), but it comes at a very high cost of lower growth and diminished opportunity.

One of the reasons why this blog is called International Liberty is that the world is a laboratory, with some nations (such as France) showing why statism is a mistake, other jurisdictions (such as Hong Kong) showing that freedom is a key to prosperity, and other countries (such as Sweden) having good and bad features.

It’s time to include Chile in the list of nations with generally good policies. That nation’s transition from statism and dictatorship to freedom and prosperity must rank as one of the most positive developments over the past 30 years.

Thirty years ago, Chile was a basket case. A socialist government in the 1970s had crippled the economy and destabilized society, leading to civil unrest and a military coup. Given the dismal situation, it’s no surprise that Chile’s economy was moribund and other Latin American countries, such as Mexico, Venezuela, and Argentina, had about twice as much per-capita economic output.

Realizing that change was necessary, the nation began to adopt pro-market reforms. Many people in the policy world are at least vaguely familiar with the system of personal retirement accounts that was introduced in the early 1980s, but we explain in the article that pension reform was just the beginning.

Let’s look at how Chile became the Latin Tiger. Pension reform is the best-known economic reform in Chile. Ever since the early 1980s, workers have been allowed to put 10 percent of their income into a personal retirement account. This system, implemented by José Piñera, has been remarkably successful, reducing the burden of taxes and spending and increasing saving and investment, while also producing a 50-100 percent increase in retirement benefits. Chile is now a nation of capitalists. But it takes a lot more than entitlement reform, however impressive, to turn a nation into an economic success story. What made Chile special was across-the-board economic liberalization.

We then show the data (on a scale of 1-10) from the Fraser Institute’s Economic Freedom of the World, which confirm significant pro-market reforms in just about all facets of economic policy over the past three decades.

But have these reforms made a difference for the Chilean people? The answer seems to be a firm yes.

This has meant good things for all segments of the population. The number of people below the poverty line dropped from 40 percent to 20 percent between 1985 and 1997 and then to 15.1 percent in 2009. Public debt is now under 10 percent of GDP and after 1983 GDP grew an average of 4.6 percent per year. But growth isn’t a random event. Chile has prospered because the burden of government has declined. Chile is now ranked number one for freedom in its region and number seven in the world, even ahead of the United States.

But that’s not to take the limelight away from Chile. That nation’s reforms are impressive – particularly considering the grim developments of the 1970s. So our takeaway is rather obvious.

The lesson from Chile is that free markets and small government are a recipe for prosperity. The key for other developing nations is to figure out how to achieve these benefits without first suffering through a period of socialist tyranny and military dictatorship.

Heck, if other developing nations learn the right lessons from Chile, maybe we can even educate policy makers in America about the benefits of restraining Leviathan.

I’m in Vilnius, Lithuania, where I just finished speaking to a regional conference of the European Students for Liberty.

I subjected the kids to more than 90 minutes of pontificating and 73 PowerPoint slides, but I could have saved them a lot of time if I simply showed them this Rahn Curve video and then posted just one slide – the one showing that the burden of government spending in Europe used to be very small.

This slide shows that government spending used to consume only about 10 percent of European economic output in the 1800s and less than 15 percent of GDP as late as 1913.

I explained to the students that it was during this period of small government that Europe became a rich continent. It was back during this time that most European nations didn’t have income taxes, so there wasn’t big government to misallocate economic output, and there weren’t high tax rates to discourage economic output.

In my conclusion, I offered the students a good news scenario and bad news scenario. The good news is that we know how Europe became rich and we know that a return to small government and free markets will enable Europe to again enjoy rapid growth.

The bad news is that Europe will probably move in the wrong direction rather than right direction. I shared this data from the Bank for International Settlements, showing that even supposedly sober-minded and prudent nations such as Germany and the Netherlands are going to face Greek-Style fiscal crises.

Which is why I was only half-joking during the Q&A session when I suggested that the students stock up on guns and ammo. If and when the continent-wide fiscal crisis occurs (because Europe has poorly designed entitlement programs, just like America), and there’s no Germany or no IMF to provide bailouts, the looters and the moochers are going to switch from being run-of-the-mill rioters and instead become marauding gangs.

Not surprisingly, some people disagree with my analysis. Paul Krugman of the New York Times criticized Estonia yesterday, writing that the Baltic nation suffered a “Depression-level slump” in 2008 and has only managed an “incomplete recovery” over the past few years.

He blames this supposedly weak performance on “austerity.”

I have a positive and negative reaction to Krugman’s post. My positive reaction is that he’s talking about a nation that actually has cut spending, so there’s real public-sector austerity (see Veronique de Rugy’s L.A. Times column to understand the critical difference between public-sector and private-sector austerity).

This is a sign of progress. In the past, he launched a silly attack on the U.K. for a “government pullback” that never happened, so what he wrote about Estonia at least is based on real events.

My negative reaction is that Krugman is very guilty of cherry-picking data. If you look at the chart that accompanies his post, Estonia’s economic performance isn’t very impressive, but that’s because he’s only showing us the data from 2007-present.

The numbers are accurate, but they’re designed to mislead rather than inform (sort of as if I did a chart showing 2009-present).

But before exposing that bit of trickery, there’s another mistake worth noting. Krugman presumably wants us to think that the downturn coincided with spending cuts. But his own chart shows that the economy hit the skids in 2008 – a year in which government spending in Estonia soared by nearly 18 percent according to EU fiscal data!

It wasn’t until 2009 that Estonian lawmakers began to reduce the burden of spending. So I guess Professor Krugman wants us to believe that the economy tanked in 2008 because of expectations of 2009 austerity. Or something like that.

Returning now to my complaint about cherry picking data, Krugman makes Estonia seem stagnant by looking only at data starting in 2007. But as you can see from this second chart, Estonia’s long-run economic performance is quite exemplary. It has doubled its economic output in just 15 years according to the International Monetary Fund. Over that entire period – including the recent downturn, it has enjoyed one of the fastest growth rates in Europe.

This doesn’t mean Estonia is perfect. It did experience a credit/real estate bubble, and there was a deep recession when the bubble burst. And the politicians let government spending explode during the bubble years, almost doubling the budget between 2004 and 2008.

But Estonia reacted to the overspending and the downturn in a very responsible fashion. Instead of using the weak economy as an excuse to further expand the burden of government spending in hopes that Keynesian economics would magically work (after failing for Hoover and Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, and Obama in 2009), the Estonians realized that they needed to cut spending.

And now that spending has been curtailed, it’s worth noting that growth has resumed.

What makes Krugman’s rant especially amusing is that he wrote it just as the rest of the world is beginning to notice that Estonia is a role model. Here’s some of what CNBC just posted.

Sixteen months after it joined the struggling currency bloc, Estonia is booming. The economy grew 7.6 percent last year, five times the euro-zone average. Estonia is the only euro-zone country with a budget surplus. National debt is just 6 percent of GDP, compared to 81 percent in virtuous Germany, or 165 percent in Greece. Shoppers throng Nordic design shops and cool new restaurants in Tallinn, the medieval capital, and cutting-edge tech firms complain they can’t find people to fill their job vacancies. It all seems a long way from the gloom elsewhere in Europe. Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. …How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank. …that’s not exactly the message that Europeans further south want to hear. …Estonia has also paid close attention to the fundamentals of establishing a favorable business environment: reducing and simplifying taxes, and making it easy and cheap to build companies.

While spending cuts have triggered strikes, social unrest and the toppling of governments in countries from Ireland to Greece, Estonians have endured some of the harshest austerity measures with barely a murmur. They even re-elected the politicians that imposed them. “It was very difficult, but we managed it,” explains Economy Minister Juhan Parts. “Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers’ salaries by 20 percent and the average civil servants’ by 10 percent,” Parts told GlobalPost. …As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection — all measures that have been met with anger when proposed in Western Europe.

But, unlike certain American politicians, at least the Estonians understand the problem and are taking steps to move in the right direction. I hope they continue.

P.S. The President of Estonia, a Social Democrat named Toomas Hendrik Ilves, used his twitter account to kick the you-know-what out of Krugman yesterday. For amusement value, check out this HuffingtonPost article.

P.P.S. A few other nations, such as Canada and New Zealand, also imposed genuine spending restraint in recent decades and they also got good results.

I’ve also cited the work of academic scholars from all over the world, including the United States, Australia, and Sweden. The evidence is very persuasive that big government is associated with weaker economic performance.

Now we have some new research from the United Kingdom. The Centre for Policy Studies has released a new study, authored by Ryan Bourne and Thomas Oechsle, examining the relationship between economic growth and the size of the public sector.

The chart compares growth rates for nations with big governments and small governments over the past two decades. The difference is significant, but that’s just the tip of the iceberg. The most important findings of the report are the estimates showing how more spending and more taxes are associated with weaker performance.

Using tax to GDP and spending to GDP ratios as a proxy for size of government, regression analysis can be used to estimate the effect of government size on GDP growth in a set of countries defined as advanced by the IMF between 1965 and 2010. …As supply-side economists would expect, the coefficients on the tax revenue to GDP and government spending to GDP ratios are negative and statistically significant. This suggests that, ceteris paribus, a larger tax burden results in a slower annual growth of real GDP per capita. Though it is unlikely that this effect would be linear (we might expect the effect to be larger for countries with huge tax burdens), the regressions suggest that an increase in the tax revenue to GDP ratio by 10 percentage points will, if the other variables do not change, lead to a decrease in the rate of economic growth per capita by 1.2 percentage points. The result is very similar for government outlays to GDP, where an increase by 10 percentage points is associated with a fall in the economic growth rate of 1.1 percentage points.16 This is in line with other findings in the academic literature. …The two small government economies with the lowest marginal tax rates, Singapore and Hong Kong, were also those which experienced the fastest average real GDP growth.

The folks at CPS also put together a short video to describe the results. It’s very well done, though I’m not a big fan of the argument near then end that faster growth is a good thing because it generates more tax revenue to finance more government. Since I’m a big proponent of the Laffer Curve, I don’t disagree with the premise, but I would argue that additional revenues should be used to finance lower tax rates.

Since I’m nit-picking, I’ll also say that the study should have emphasized that government spending is bad for growth because it inevitably and necessarily leads to the inefficient allocation of resources, and that would be true even if revenues magically floated down from heaven and there was no need for punitive tax rates.

It’s also worth pointing out that there are several policies that impact on economic performance. The Koch Institute video focuses primarily on the key issues of fiscal policy and regulation, but trade, monetary policy, property rights, and rule of law are examples of other policies that also are very important.

This video, narrated by yours truly, looks at economic growth from this more comprehensive perspective.

The moral of the story from both videos is very straightforward. If the answer is bigger government, you’ve asked a very strange question.